This fixed maturity plan can be a better alternative to your FD investment

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State Bank of India, the country’s largest lender, offers a wide range of deposit schemes for investors. Customers can invest in fixed maturity plans (FMP), which is a fixed tenure mutual fund scheme gives higher returns than normal FD schemes. FMPs come with a stipulated maturity period that invests the corpus in debt instruments maturing in line with the tenure of the scheme. The maturity period is varying between few months and few years.

FDs, on the other hand, allow an investor to park his or her money until a specified maturity time.

Returns

SBI FMPs are open for subscription only during a specified period at the time of launch. FMPs generate returns that are equivalent to the yield of securities with similar maturities prevailing on the date of the investment.

The interest rate is decided at the time of opening of the FD account. So, the depositor is aware of the maturity value at the starting time of investment only.

Tenure

The tenure of a fixed maturity plan can vary between a few months and few years. The tenure of normal fixed deposit varies between 7 days and 10 years.

Premature withdrawal

The investment is locked-in for the specific period in case of SBI’s FMP. No pre-mature withdrawal is permissible.

While in case of FD, SBI offers a premature withdrawal facility. For fixed deposits up to Rs 5 lakh, the penalty for premature withdrawal is fixed at 0.50 per cent for all tenors and FD above Rs 5 lakh the penalty is 1% across all tenure.

Taxation

FMPs offer indexation benefit, which means that one can get higher returns after paying tax. The returns one get from FMPs are called capital gains.

In case of FDs, the interest income is added to the investor’s income and is taxable at the applicable tax slab and that is high in comparison with the FMP.

Risk factor

Normal fixed deposit is 100% safe and secure. These deposits are not market-linked. On the other hand, FMP is a slightly risk-oriented investment instrument than normal FD. But FMPs are least exposed to interest rate risk because the fund manager will normally hold the instruments till maturity. Also, FMPs generally invest in securities with higher credit quality so that credit and liquidity risks are minimal.

Expert views

“FMP is a good investment option with slight risk.  Basically, it gives higher returns than a normal FD with very less risk factor,” said Arvind Agarwal, a tax expert.

“Suppose you invest Rs 1 lakh in FD and FMP both for a period of 1,616 days. The maturity value of FD would be Rs 1,26,252 and in FMP it would be Rs 1,25,690. But after the tax compliances and other deductions, the person will finally get Rs 1,23,261 from FMP and Rs 1,18,061 from FD investment. It means almost Rs 5,000 more at the end of the tenure. So, it is always wise to invest in FMPs than multiple FDs in different banks,” said Nilotpal Banerjee, a tax expert.